What is Insurance?

In its simplest form, insurance is the main way for individuals and businesses to reduce the financial impact of a risk occurring. For example, if you have fire insurance on your home or business property and your home or business burns down, you will get money from the insurance company to rebuild or replace the structure. You can purchase insurance for numerous risks including fire, theft, personal injury claims, natural disasters (floods, tornadoes, etc.), property damage and many others.Understanding the basics of insurance requires an understanding of a few key concepts. An insurance agreement is a contract between the insurance company (the insurer) and the covered person(s) or business (the insured). The insurance policy will cover what risks, perils or medical conditions are the subject of the agreement. If the insured incurs such a risk, peril or medical condition, they can file a claim with the insurer.

A policy will have a number of provisions. Coverages define what types of risks the insurance policy covers. In auto insurance, for example, liability coverage will pay for covered damages if you cause an accident, hurt someone or damage someone’s property. It can also pay to defend you if a lawsuit results. Collision coverage helps pay for damage to your vehicle when your car is in an accident. Comprehensive coverage helps pay for damage to your vehicle that is not caused by a collision such as theft, vandalism, storms and certain natural disasters. Medical payments coverage helps pay for covered medical expenses for anyone injured while in your vehicle, regardless of who is at fault. Each of these coverages will have provisions that specify what is claimable, what is excluded and what rules, duties or obligation an insured has to follow.

Finally, it is important to understand some real world logistics to recognize where an insurance company’s duties come into play and how they exist in the real world. For example, you can purchase an insurance policy for your home. If a fire starts in your home and you and a neighbor are hurt, then there are a number of harms: you are injured, your neighbor is injured and your home is damaged. An insurance policy is built around “coverages” for such harms.

Coverages define the harms that will be “covered” in the policy. The insurance company in turn will sell thousands of policies based on these covered harms. Most of the policyholders will not make a claim in any particular period, but will pay policy premiums. The aggregation of all the policyholders’ premiums pays for the harms incurred by the small percentage of policyholders that have a loss in any particular period.

Let’s return to logistics. Your house has burnt down; you and your neighbor are injured. As the policyholder, you will make a claim with your insurance company for the costs related to your injury and the damage to your home. Your neighbor may choose to file a claim with your insurance company or file a suit against you. In many situations, the neighbor may have to file a lawsuit against you. This lawsuit will trigger coverages on your insurance policy: the policy provision covering injuries to others on your property and the insurance company’s duty to defend you in this type of lawsuit.

Generally, insurance policies and insurance laws separate harms into two types of coverage: harms that the policyholder (or insured) incurs and harms that another person incurs. These are referred to as “first party” coverage and “third party” coverage. These coverages trigger different types of duties. For example, under a homeowner policy, the “first party” is the homeowner and the person who generally receives benefits under the policy. You own your home and insure it against fire so that if your house burns down, you get money to rebuild it. This is an example of a “first party” claim. A “third party” claim comes from another person, like a neighbor hurt in your house fire. Your home insurance likely contains a general liability coverage provision, and insures you against lawsuits from your neighbor for the damages that they may have incurred because of your house fire.

At the heart of claims and lawsuits is a legal concept known as liability. Liability issues get complicated very quickly. These complications are why you should always consult with an insurance lawyer to help assess your rights and risks. Using a simple definition of liability as the harms that an insurance company must cover will shed some insight into what your insurance company must do for you. In the example of a neighbor being injured in your house fire, assume that your insurance company simply said they were not liable, and refused to help you. You would have to defend the lawsuit against the neighbor and determine responsibility and damages. Then you would have to file a lawsuit against the insurance company for reimbursement of legal costs and any damages that you had to pay your neighbor. This would be a messy situation.

Insurance laws, court cases and regulatory agency laws have created a set of standards and duties for insurance companies to address this type of mess. Some of the most important ones are discussed below.

Duties of the Insurance Company

Described below are some of the basic responsibilities of an insurance company. These are duties owed to the insured. If they are broken, the insurance company is likely to face liability for the damages that result.

Duty to Defend
This is a duty to defend the policyholder when a third party brings a claim. The insurance company must hire a lawyer at its own expense to represent the policyholder to provide a meaningful defense and pay for all of the litigation costs. The duty is very broad and extends to all claims potentially covered under the policy based on facts alleged or otherwise disclosed in the claim. The courts have held that a meaningful defense is one that includes all claims and does not allow an insurance company to parse claims.

Duty to Indemnify
Indemnity as written and specified in contracts is often confusing. However, the concept is simple and refers to the obligation of one party to pay for the loss incurred by another party. As a policyholder, if you are found liable to a third party for damages, the insurance company must pay the damages – at least up to the policy limits. In insurance parlance, such a payment is called indemnity.

Duty of Good Faith and Fair Dealing
The courts have found that the special relationship between an insurance company and a policyholder creates a duty of “good faith and fair dealing.” The courts have often referred to what a policyholder is really buying as “peace of mind.” To get this peace of mind, an insurance company must do what is right to protect the policyholder. When an insurance company doesn’t do what is right, they may be acting in “bad faith.” This bad behavior triggers very severe penalties for an insurance company: specifically the possibility of punitive – punishment– damages for their actions.Duty To Fairly & Quickly Manage Claims
In both first party and third party claims, the insurance company has the duty to fairly and promptly investigate the claim and provide the benefits of the policy including paying valid claims. These duties are governed by the insurance company’s duty of “good faith and fair dealing” and must be carried out with reasonable speed.

Duty To Disclose Conflicts
Many types of conflicts can occur in an insurance case and they must be disclosed to the insured. The defending attorney must equally weigh the interest of both the insurance company and the policyholder. If there is a conflict, the defense attorney must disclose it to both. Many conflicts then require a separate attorney for the insured – paid for by the insurance company. This is called Cumis counsel.

One conflict that exists in most cases is the possibility of the defending lawyer using policy limits as the upside risk to the insurance company at the risk of hurting the policyholder. Amounts over the limit would be the responsibility of the insured. The insured wants the defending attorney to aggressively settle the claim within the limits of the policy. A conflict may occur if the defending attorney knows he has a good chance of losing, but tries to minimize the settlement by threatening to go to trial. The defending attorney may use this tactic to scare the plaintiff’s attorney – remember, many law firms are small and don’t have trial experience and cannot pursue long and costly lawsuits.

Another common conflict is when an insurer believes certain claims are not part of the policyholder’s coverage and issues a “reservation of rights” letter stating that the insurance company reserves its rights to later deny the claim should facts surface that prevent coverage. These are conflicts that result in the defense developing a strategy that hurts the insured based on how the claims in a case are addressed and defended. In California, when an insurance company issues a “reservation of rights” letter, it is often acknowledging a conflict that may allow the insured to elect to hire a separate attorney.

Duty To Hire Separate Lawyer or Cumis Counsel
When conflicts prevent the insured from getting a proper defense, the insurance company must hire and pay for a separate lawyer to defend the policyholder. This lawyer is known as a Cumis counsel – an attorney representing a defendant in a lawsuit when there is an insurance policy covering the claim, but there is a conflict of interest between the insurance company and the insured. A separate attorney can lead to a better defense for the insured. Despite conflicts occurring frequently, their disclosure is not. Nor is it common for Cumis counsel to be appointed. We have litigated numerous cases where Cumis counsel should have been appointed but was not. Insurance companies have had to pay damages caused by the failure to provide Cumis counsel.

Duty To Settle Within Insurance Policy Limits:
Recent California law indicates that an insurer should make a good faith effort to settle a case within its own policy limits regardless of whether or not the other party demands such a settlement. Failure to do so can lead to “bad faith” by the insurance company.

What Rights Do You Have When an Insurance Company Breaks Its Duties?

If your insurance company breaches your insurance contract or acts in bad faith you incur damages, you can sue and recover damages. The Law Offices of Scott Glovsky can help. If you have suffered damages because of your insurance company’s wrongful denial, Call us at 1-877-316-2093, complete the form below or send us an inquiry form by clicking here. There is no cost for this initial consultation.

Common Concerns of Policyholders

What if a case is tried against me and the amount of the judgment is more than my insurance policy?
This is a key question, and it has resulted in a number of published court opinions. The most important principle to remember in this area is that the insurance company has a duty to defend you, which includes a duty to reasonably settle claims so that you are protected from third parties coming after your assets.

If you are involved in a case and the third party (the person suing you) makes a reasonable demand that the case be settled within the limits of your policy, your insurance company must either honor that demand (pay it) or else bear the risk that the judgment will exceed the policy limits. Because California law requires insurance companies to act in good faith to settle disputes within policy limits, the loss of a suit at trial in an amount greater than the policy limit places the insurer at risk of having to pay the additional amount. In practice, excess judgments are often resolved by (1) the insured assigning their right to pursue the insurance company to the claimant, or (2) the insured hiring an attorney to pursue a bad faith suit against their insurance company.

Is insurance coverage discoverable – can the other side get my insurance information?
It depends. In fact, many states expressly state that a party’s insurance information is discoverable because it helps people to evaluate a claim and a party’s ability to respond should there be an adverse judgment. Bear in mind that discovering insurance information is totally distinct from discovering a party’s wealth. Insurance is different because is it a contract specifically set up to administer and deal with litigated claims, and the legislatures and courts in many states have determined that open communication about insurance relationships is in the public’s best interest because it leads to fair settlements of disputed claims.

In California, Section 2017.210 of the Code of Civil Procedure specifically authorizes the discovery of insurance information as a matter of right in litigation. Subsection 210 says that a party is entitled to discover the “existence and contents of any agreement under which any insurance carrier may be liable to satisfy in whole or in part a judgment that may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment.”